FTSE 100 banking stocks do not always command much enthusiasm from investors. But NatWest (LSE: NWG) looks more compelling to me than at any point in recent years.
Its latest updates have shown steadily rising earnings, a stronger balance sheet, and increasingly generous returns to shareholders. And all while the shares continue to trade at a hefty discount to their long‑term fundamentals.
So, following its latest Q1 numbers, is now the moment for me to snap up more of the stock while it still looks cheap?
How do the growth drivers look?
A risk to NatWest’s growth momentum is increased competition in its key mortgages and deposits operations, which could squeeze its margins. Another is any worsening in the UK’s economy that could increase defaults on lending, increasing impairment charges.
Nonetheless, analysts forecast its earnings will grow by an average 4.6% a year over the medium term at least. This looks well supported to me by its Q1 2026 figures released on 1 May, if not a significant underestimate.
Total income jumped 9.5% year on year to £4.36bn, helping boost profit before impairment losses 15.7% to £2.32bn. The figures underline the continued benefit of deposit‑margin expansion and lending balance growth, which are set to remain key earnings drivers.
Operating profit before tax surged 12.2% to £2.03bn, highlighting strong deposit margin expansion and broad‑based lending growth. And earnings per share soared 15.5% to 17.9p, reflecting robust capital generation and balance‑sheet strength.
Together, these trends show NatWest entering 2026 with firm momentum behind it and further earnings growth ahead.
What does this mean for the valuation?
A share’s price reflects whatever number buyers and sellers are willing to agree on at a given moment. But its value is determined by the underlying strength and prospects of the business itself.
Over time, market prices tend to move back toward a company’s true worth (‘fair value’). This is why being able to quantify this gap is crucial for long-term investors’ profits.
Discounted cash flow (DCF) analysis determines what a stock is truly worth by forecasting future cash flows and discounting them back to today’s value. When those forecasts are less certain, investors demand higher returns, which increases the discount applied.
Differing assumptions mean analysts’ DCF outcomes can vary. Using my own approach — including an 8.3% discount rate — NatWest looks 57% undervalued at its current £5.45 price.
That implies a fair value of £12.67 — more than double the present level. If markets continue to correct this price-to-value gap over time, this could be an excellent opportunity if those DCF assumptions hold.
My investment view
NatWest looks extremely well placed to me to generate the earnings growth needed to drive a meaningful rise in its share price over time.
Analysts also expect the dividend to keep rising, with forecast yields reaching 7% next year and 7.6% in 2028. These are more than double the current FTSE 100 average of 3.1%. And this constitutes a powerful income component to add to the valuation case for investment.
It is more than enough to cause me to buy more at the earliest opportunity. And I also have my eye on other very underpriced, high-yield stocks in other sectors too.
